European Business News (EBN), 97-07-25

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Page last updated Fri, July 25 4:51 PM CET

CONTENTS

[01] Guinness and Grand Met issue statement rejecting LVMH's three-way merger proposal

[02] Rhone-Poulenc post positive second-quarter results

[03] UK GDP rises 0.9% in second-quarter; up 3.4% on year

[04] Jospin: France's budget deficit will not exceed 3% of GDP

[05] British Airways looks at starting a low-cost carrier

[06] Germany at risk of importing inflation with weak mark

[07] US June durable goods orders rise 2.3%

[08] Creditanstalt sees a 'substantial' profit increase for 1997

[09] Prosecutors indict former chairman of Dai-Ichi Kangyo Bank

[10] Interros and Deutsche Bank pay $1.8 billion for Russian telecom stake

[11] Microsoft pushes to woo European telecoms operators

[12] Corporate and Economic Briefs

[01] Guinness and Grand Met issue statement rejecting LVMH's three-way merger proposal

By Stephen Jack and George Matlock -- AP-Dow Jones, London

In the most verbose manner so far in an increasingly ugly debate, Guinness and Grand Metropolitan batted back Moet Hennessy Louis Vuitton's proposals for a three-way spirits merger, and the two U.K. companies appeared to have key investors on their team.

Grand Met and Guinness issued a joint 10-page statement on why they think the proposal laid out by LVMH Chairman Bernard Arnault would harm shareholders of the combined Grand Met/Guinness company, to be called GMG Brands.

Tax costs stemming from Arnault's plan would result in a loss of some £1.5 billion ($2.5 nillion) of value 'and possibly significantly more,' the statement said.

And LVMH's claims that its link-up would create additional cost savings of £65 million and revenue benefits of at least the same amount were dismissed in aggressive fashion in the statement:

'Based on Guinness' past experience with Moet Hennessy, the practical difficulties of achieving this level of savings should not be underestimated.'

Some important institutions agreed, though at least one has shed part of its holdings in Grand Met to book profits.

'We're seeing Arnault sometime next week, but we're not impressed by what he's said so far,' said one fund manager who holds 3% of both Grand Met and Guinness in portfolio.

'We want the GMG deal to go ahead because we can see value in it,' he added. 'Arnault is bringing nothing to the table as far as we can see, but we'll keep an open mind until we meet him.'

[02] Rhone-Poulenc post positive second-quarter results

Earnings per share rose 17% to 2.83 francs from 2.41 francs for the same period a year earlier.

Net income for the first-half of the year increased by 14% to 1.6 billion francs ($260.2 million) from 1.41 billion francs.

Financial analysts had expected a first half net income figure in the range of 1.48 to 1.6 billion francs.

Rhone-Poulenc also said that given its second-quarter earnings, 'we are maintaining our objective of increasing earnings per share by 20% in 1997, excluding exceptional items.'

The company also noted that the first-half earnings figures don't take into account the company's June 26 announcement that it's considering buying the 31.7% of U.S. pharmaceuticals company Rhone-Poulenc Rorer it doesn't already own.

Financial analysts had expected a first half net income figure in the range of 1.48 to 1.6 billion francs.

[03] UK GDP rises 0.9% in second-quarter; up 3.4% on year

The Office for National Statistics said British gross domestic product expanded by a provisional 0.9% in the second quarter from the first and was up 3.4% on the year, slightly below market expectations of 1.0% quarterly and 3.5% annual growth.

The quarterly growth rate was unchanged from the first quarter, but annual GDP growth accelerated from 3.1% in the previous quarter.

More detailed GDP figures will be published Aug. 21.

Although the data were slightly weaker than expected, economists said they did little to alter the outlook for higher interest rates.

'The numbers were marginally depressed by a temporary drop in construction output, but they show the economy is still growing at an unsustainable rate,' said Adam Cole, U.K. economist at HSBC James Capel in London.

Accordingly, the Bank of England's official lending rate is still set to rise 0.25 percentage point to 7% next month, he added.

The central bank's monetary-policy committee will meet in early August to decide whether to raise the official lending rate for the fourth time since early May.

Expectations of higher rates have contributed to sterling's sharp rise since autumn against the currencies of the U.K.'s major trading partners, which in turn is hampering British exporters' competitiveness.

[04] Jospin: France's budget deficit will not exceed 3% of GDP

Jospin, speaking during a radio interview, also said he had spoken to German Chancellor Helmut Kohl yesterday and that each agreed that their countries had to do what was necessary for them to create the single currency union.

Asked whether Kohl had 'rallied' to the French view that the 1997 deficit needed only to 'trend' toward 3.0%, Jospin said 'it's not a question of rallying' to each other's point of view but of doing what is necessary for European economic and monetary union (EMU).

The Jospin government on Monday unveiled budget amendments aimed at getting the 1997 deficit down to between 3.1% and 3.3% of GDP. That compares with 4.2% in 1996.

Jospin also noted that the strong dollar was good for French exports but could hurt import prices, notably oil. He said he agreed with an article which said the weakening of the franc and Deutsche mark against the dollar was due to the many years that France and Germany were suffering from weak economies and high unemployment.

Jospin, speaking on RTL radio, avoided saying that the country's deficit- ridden social security system needed to be reformed, as finance minister Dominique Strauss-Kahn indicated in an interview published yesterday in the International Herald Tribune.

Jospin said Strauss-Kahn's remarks had probably been misinterpreted in translation. He said the system had to be 'defended and comforted' and that it had to be 'efficient' in the context of 'mastering the evolution of its accounts.' The social security system this year is expected to have a deficit of between 44 billion francs ($7.1 billion) and 49 billion francs, down from 54 billion francs in 1996.

Jospin continued to express France's 'concern' over the approval by the E.U. Commission of the merger between Boeing and McDonnell Douglas.

[05] British Airways looks at starting a low-cost carrier

A spokeswoman for British Airways said the company had appointed HHCL and Partners, an advertising agency, to conduct research into the European leisure travel market.

This will include an examination of the challenge posed by low cost carriers such as EasyJet, the Luton-based airline, and Ryanair of Ireland.

However, the spokeswoman said British Airways' research was at an early stage and it hadn't taken any decisions.

British Airways already has franchise arrangements with small carries in the U.K., continental Europe and South Africa. These are independent companies but their aircraft are painted in British Airways livery and they provide a comparable level of service.

The low cost carriers undercut the fares of larger airlines by eliminating food and drink service on board and by not issuing tickets.

One option open to British Airways would be to take a stake in a low cost carrier. The airline has reportedly held talks with EasyJet that were inconclusive.

Another option would be for the company to start its own no frills carrier.

That's the option being pursued by Richard Branson's Virgin Group, which owns both a full-service airline Virgin Atlantic and a low cost carrier Virgin Express.

[06] Germany at risk of importing inflation with weak mark

Data out today showed that while import prices fell 0.2% on a month-on- month basis in June, the yearly rate rose to 3.3% from 2.8% in May - the highest annual rise in six years.

Economists say this is a sign of things to come. 'We have had quite a significant further decline in the deutschemark since June and people will be looking to see how that effects import price data going forward,' said Ros Lifton, senior international economist at HSBC Markets in London.

Lifton said that she estimated the average dollar/mark exchange had been around 1.73 marks in June. Since then, the mark has lost another 10 pfennigs in value - trading at six-year lows at around 1.84 to the dollar in recent sessions.

'Clearly we are going to see further rises in import prices,' said Lifton.

For the Bundesbank, the question is whether pipeline price pressure will spell real danger for headline inflation. Its key interest rates have remained historically low for 15 months - the longest period since the mid- to late-1970s.

'The Bundesbank is in a very difficult situation,' said Armin Kayser, economist at SBC Warburg in Frankfurt. 'If they look at the precipitous decline of the mark and rising import prices, a pre-emptive move on rates would be justified.'

'But at the same time, the domestic economy looks pretty fragile and it is hard to see them punishing the adjustment process which is underway in Germany.'

Dresdner Kleinwort Bension economist Stefan Bergheim said Germany had entered a period of two-tier inflation, with all price indicators which depend heavily of the mark's value showing consistent upward pressure, while high street prices remained subdued.

Pointing to the mark's continuous depreciation over the past few years and the relatively muted effect on headline inflation, Bergheim said he expected this two-tier pattern to continue, presenting no immediate threat of a rise in interest rates.

But Kayser said that with the trade-weighted value of the mark around 8.0% lower in July this year than in July 1996, import prices were set for a pretty hefty rise in the coming months.

'There is a significant risk that this will raise import prices by as much as five percent - we could be heading for that kind of (year-on-year) figure by the autumn,' he said.

Germany's annual inflation rate is still comfortably below 2.0%. Although the direct effect of the sufferings of the mark on consumer price inflation has been minimal so far, Kayser said he could not believe that such a sharp rise would not filter through to high street prices soon.

[07] US June durable goods orders rise 2.3%

The June increase was the largest since a 3.4% rise in January.

Analysts had expected an increase in the transportation category after Boeing Corp. reported at the Paris Air Show that its orders rose sharply in June.

The overall durable goods increase was slightly higher than analysts had expected.

A Dow Jones Newswires survey of 17 economists published Wednesday found an average estimate of a 1.5% rise fall in June durable goods orders. Durable goods data are not adjusted for inflation. The dollar moved higher against the Deutsche mark but was flat against the yen after the data.

The dollar is now quoted at DM1.8376 and Y116.24 compared with DM1.8367 and Y116.24 just before the release of the indicator at 1230 GMT (8:30 a.m. EDT).

U.S. durable goods orders rose 2.3% in June from May. Economists had expected an increase of 1.5%.

[08] Creditanstalt sees a 'substantial' profit increase for 1997

Earlier in the day, the bank, a unit of Bank Austria, reported first half net profit jumped 69% to 2.2 billion schillings ($152 million) from 1.3 billion schillings for the same period a year earlier.

It also said operating profit rose 38% to 4.21 billion schillings ($328 million), while revenues were up 20% to 10.86 billion schillings.

'For all of 1997, we expect a substantial increase in net profit for the fifth year in a row,' the bank said. But while Hampel was clear about Creditanstalt's immediate financial future - bright - he was vague about the group's corporate future.

Bank Austria bought a 70% voting stake in Creditanstalt early this year from the government, taking control of its chief domestic rival. The deal prevents an outright merger of the two banks and most asset stripping for five years.

While following a 'two-name strategy,' the banks said earlier this month they would merge their treasury and investment banking units. They will also put their eastern European assets together in a common holding company.

The process is expected to be completed by the end of September, but Hampel said Friday there are no developments to report.

There is also no 'interim report' on Bank Austria's plan to offer its shares for outstanding Creditanstalt shares later this year, Hampel said.

Independent appraisals of the banks, which will be the basis of the swap offer, should be completed by the end of August, the chairman said. The swap offer is expected to be made in October.

[09] Prosecutors indict former chairman of Dai-Ichi Kangyo Bank

Okuda, 65, was arrested July 4 on suspicion of having conspired with other officials to get the third largest commercial bank to extend 11.78 billion yen ($101.6 million) in loans through its non-bank affiliate, Daiwa Shinyo, to sokaiya Ryuichi Koike from 1994 to 1996 in violation of the Commercial Code.

The Commercial Code bans companies from giving favours to shareholders, including 'sokaiya' racketeers, who own minor stakes in companies and threaten them to disrupt shareholders meetings unless they are paid off.

Okuda served as DKB president from April 1992 to April 1996 and was later chairman until June 13 this year when he stepped down from the post after the scandal came to light.

Kuniji Miyazaki, another former DKB chairman also considered a key figure in the scandal, died June 29 after hanging himself at his home in Tokyo. DKB is accused of having extended loans totalling 11.78 billion yen to Koike through Daiwa Shinyo between July 1994 and September 1996 to ensure his co-operation at the bank's annual shareholders' meetings. Koike is a shareholder of DKB with 26,000 shares.

[10] Interros and Deutsche Bank pay $1.8 billion for Russian telecom stake

The size of the winning bid for Svyazinvest - well above expectations - should be a big boost to the cash-starved Russian government.

The minimum bid was $1.18 billion, and the government said the second- largest bid was $1.71 billion.

Oneximbank, one of Russia's largest commercial banks, controls the Interros financial group, which includes the MFK bank, Renaissance Capital investment firm and various metals and energy companies.

[11] Microsoft pushes to woo European telecoms operators

The U.S. software giant's Internet Explorer has dislodged competitor Netscape Communications' Navigator as the browser of choice in six European markets, and market share is rising daily, Georges Nahon, head of Microsoft's Paris-based European Internet and Communications unit, said in an interview with Dow Jones.

He added that Microsoft's growing penetration of the browser market is only the tip of the iceberg in its broader strategy of developing browser-based software products for telecommunications operators as they race to offer Internet-based services to customers.

Nine months ago, Internet Explorer 3.0 accounted for just 15% of European browser sales, reflecting its late start in the online software arena compared to competitors.

A new version of Internet Explorer will be launched at the end of summer, and Microsoft executives expect a surge in market share, particularly because the new release will be integrated into Windows 98, an upgraded version of the company's Windows 95 operating system.

Microsoft's share of the European market is running about 10 percentage points ahead of the U.S., and shares in Latin America and the Far East are similar to Europe.

Analysts say part of Internet Explorer's success results from its free distribution on the Internet and by Internet service providers. By comparison, Netscape offers a free one-month trial of the downloadable Navigator, but users must either buy the full product or download a new copy when the trial period expires.

Microsoft executives disagree that the steep rise in market share reflects the fact that their browser is free. Indeed, they argue that their success is all the more notable because many Internet service providers committed contractually and commercially to use Navigator before Internet Explorer came on the market.

By David Pearson, Dow Jones

[12] Corporate and Economic Briefs

France's seasonally-adjusted trade surplus in May totaled 16.5 billion francs ($2.66 billion), up from 15.6 billion francs in April, and is on track for a record year, the finance ministry said. The April figure was revised from 16 billion, and the May figure was in line with economists' expectations. During the first five months of the year, the seasonally- adjusted trade surplus doubled to 62.95 billion francs from 30.17 billion francs a year ago. Exports in May declined to 135.45 billion francs from 136.84 billion francs in April, while imports slipped to 118.96 billion francs from 121.24 billion francs.

The merchandise trade surplus in the Netherlands widened to 2.59 billion guilders in April from 2.04 billion guilders in the same period a year ago, the Central Bureau for Statistics (CBS) said. In March 1997, the trade surplus was 2.90 billion guilders.

Sweden's producer price index fell 0.1% in June from May 1997, according to figures released by SCB, the national statistics agency. The drop in producer prices brought the annualized change in the index to a rise of 1.7% from a rise of 1.4% in May. Market economists were expecting a 0.4% rise on the month and a 2.1% rise on the year. Import prices fell by 0.7% in June from May, almost entirely due to falling prices for crude oil and petroleum products, SCB said.

Sweden's balance of trade showed a preliminary 13.6 billion krona ($1.72 billion) a surplus in June 1997, unchanged from the surplus in June a year earlier, according to figures released by SCB. The June surplus was above the median market expectation of 12.7 billion kronor, SCB said.

Portugal's gross domestic product rose 3.0% in 1996, after rising 2.3% in the third quarter of 1996 compared with the same period the previous year, the National Statistics Institute said. The GDP, measured in constant prices, rose 1.7% in the second quarter of 1996 compared to a 2.0% year-on- year rise in the first quarter of 1996, the INE added. The INE said GDP grew 2.0% over the full year of 1995, a slight upward revision from the previous estimate of 1.8%.

From the European Business News (EBN) Server at http://www.ebn.co.uk/

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